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Hungary Tax: Hungary plans tax cuts, pay reductions in fiscal plan

Hungarian Prime Minister Viktor Orban on Tuesday said his new government would cut public pay and prohibit mortgages denominated in foreign currencies, while also effectively cutting taxes, news reports said.

The plan comes as the government attempts to undo the damage to Budapest's credibility that followed remarks by officials last week warning that Hungary's fiscal woes left it on the verge of a Greece-style implosion.

Such remarks sent the Hungarian forint reeling and heightened jitters in already nervous financial markets around the globe, particularly after a spokesman for Orban on Friday said talk of default was "not an exaggeration."

Officials spent the weekend distancing the government from the remarks, saying default wasn't on the cards and that the deficit target would be met. Read about Hungary's damage-control efforts.

On Tuesday, Orban said the government would enact a 16% flat income tax over two years, a move that would effectively lower the rate for most households from 17% and from 32% from high-income households, according to news reports.

Small- and medium-sized firms will also see a tax cut and mortgage lending in foreign currencies would be barred, Reuters reported. Orban said some state wage costs would be cut by 15%, the report said, a move that targets board members of state-owned companies and the central bank.

Lending in Swiss francs and other currencies is blamed in large part for Hungary's financial crisis, which saw Budapest receive a 20 billion euro ($24 billion) bailout package from the European Union and International Monetary Fund in 2008.

Orban indicated tax cuts would be offset by a new tax on banks, Reuters said.

Economists said the measures leave questions about the government's commitment to hitting its deficit target of 3.8% of gross domestic product this year. Officials over the weekend and on Monday said the government would hit the target, agreed to with the IMF and European Union. The government had charged that the previous government had left a far worse fiscal situation than had been previously revealed.

Overall, the measures reshuffle spending and revenues equal to less than 2% of gross domestic product over a two-year period, said Lars Christensen, chief analyst at Danske Bank.

The measures will do nothing to reduce the deficit and may even be underfunded amid uncertainty over the amount of revenue that can be raised by the bank tax, he said.

"So, either the government is at fault in claiming that the previous government's numbers do not add up, or the budget deficit will in fact be larger than 3.8% of GDP," he said.

The Hungarian forint, meanwhile, continued to claw back some of the losses versus the euro seen in the wake of last week's remarks. The forint traded at 283.30 to the euro in recent action, a gain of 0.5% on the day.

The cost of insuring Hungarian government debt against default fell back somewhat. The spread on Hungarian credit default swaps narrowed five basis points to 390 basis points, according to Markit. That means it would now cost $390,000 a year to insure Hungarian debt against default, down from $395,000 on Monday.

The spread had started last week around 214 basis points.

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